Ml ilpp+2nd halfofstoryx

Copyright 2013, 2015 - All Rights Reserved

The Second Half of the Story

- at Retirement theTrue Value of Assets is Determined by the Income They Can Produce

By Paul Bullock CLU ChFC GBA RPA CEBS FLMIPublished by Capital Strategies Press / Sponsored by MarketLinking.com

Retirement Has Two Phases• Accumulation

• Distribution

The criteria you use to make savings and investment choices is radically different for each phase of retirement. During your working years your primary goal is asset growth. Expected return, risk (uncertainty), taxation and liquidity are all factors used to make accumulation choices.

Distribution has an entirely different focus. Distribution selections are governed by their ability to maximize and prolong income. If the asset has the financial power to sustain a reliable income stream, its size and return is secondary to its structure.


Saving & Investment Mediums• Bank CD's & Coupon Bonds• Discounted Stripped Bonds• Municipal Bonds• Individual Stocks• Stock & Bond Mutual Funds• Exchange Traded Funds• Tax Deferred Annuities• Immediate Annuities• Single Premium Life Insurance

• Roth IRA• Qualified Plans, incl 401k, IRA• Stock & Bond Mutual Funds• Exchange Traded Funds• Tax Deferred Annuities• Immediate Annuities• Whole Life Insurance• Fixed Interest Universal Life• Indexed Interest Universal Life

All of the above accumulation sources offer distinct features that can be used to grow your retirement assets and fund potential retirement income. Each is appropriate in some situations and potentially destructive in others. The probable return on these asset choices can vary substantially. Additionally, the tax treatment and the risk (uncertainty) of some of these medium makes them poor choices during the distribution phase of retirement.


Focusing on assets, is a common retirement planning mistake. While asset growth is certainly an important aspect of retirement planning,

... our real goal is to maximize retirement income!


The above annual payouts (age 65 to 100) are based on a $200,000 balance earning 7.3% annually. Because of tax treatment and other considerations, there are significant variations in the net amount received each year. This comparison is presented solely to illustrate the retirement income strengths of each medium. This is not a viable analysis, because the structural differences would make it highly improbable that each medium accumulate identical amounts. We present it solely to stress the variations in distribution efficiency. (ILIPP calculations based on age 45 male in average health).

TaxableRoth IRA

QualifiedPlans Annuity

ILIPP(Variable)

ILIPP(Wash)

Balance $200.000 $200.000 $200.000 $200.000 $200.000 $200.000

Payout $12,167 $14,776 $14,776 $14,776 $21,200 $14,379

Taxes - 0 - - 0 - $3,694 $1,275 - 0 - - 0 -

Net $12,167 $14,776 $11,082 $11,586 $21,200 $14,379

Balance at Age 100 $36 $22 $22 $22 $32,294 $2,434

Retirement Payouts Compared


The Largest Asset Pile, Does Not Always Produce the Greatest Income

Differences in post retirement taxation and potential return can have a huge impact on retirement income!


The above payouts are based on annual savings for 20 years compounding at 7.3% in a 25% tax bracket. Differences in tax treatments will vary both the accumulation balances and the payout projections. In a real world situation, there would also be a significant variation in the ability of each medium to consistently earn a 7.3% return. (ILIPP calculations based on age 45 male in average health).

TaxableRoth IRA

QualifiedPlans

Tax DefAnnuity

ILIPP(Variable)

ILIPP(Wash)

After-Tax Saving $4,020 $4,020 $5,360 $4,020 $4.020 $4,020

Age 65 Balance $216,138 $284,862 $379,816 $284,862 $204,584 $204,584

Payout $13.149 $21,046 $28,816 $21,046 $21,686 $14,709

After-Tax Payout $13,149 $21,046 $21,046 $16,502 $21,686 $14,709

Balance Age 100 $9 $0 $10 $22 $33,034 $2,490

Accumulation & Payout Comparison


Accumulation versus Distribution

Professional retirement planning is concerned with delivering after-tax and after-inflation spendable income. Asset size is not a reliable indicator of its ability to sustain retirement income.


Comparing Taxation

MediumTax During

Accumulation Tax at Payout (Draw) Qualified Plans / IRA No tax on accumulations, but tax deduction

for contributionsAll distributions are fully taxed

Taxable Assets Tax on interest, dividends & capital gains when received

No Tax on draws – taxed when earned

Stripped Bonds No tax while asset appreciates to maturity Capital Gain tax on surrender

Municipal Bonds No tax on accumulations No tax on draws

Roth IRA No tax on accumulations No tax on draws

Deferred Annuities No tax on accumulations LIFO (Last In, First Out) – Draws assumed to be earnings until principal reached

Immediate Annuities Most often purchased in lump sum at retirement – No accumulation phase

Tax on interest averaged over expected lifetime of retiree

FLIPP / ILIPP No tax on accumulations Tax free retirement loans. LIFO tax on draws, Tax free at death

**FLIPP / ILIPP are life insurance products configured to maximize retirement income


Variations in Tax TreatmentsMost retirement income is taxable. Even social security can be taxed if your total income is above certain limits.

Distributions from qualified plans such as pensions, 401k’s and IRA’s are all taxable income and after age 70 ½ taxes are levied, whether distributions are made or not. Even at the lower tax brackets, income taxes can take a big chunk out of your retirement income.

However, distributions from certain life insurance policies are not taxable when received. This unique feature can be used to create tax favored retirement income that in many situations can out perform other retirement savings alternatives.


Variations in Taxation (Continued)

Taxes are paid first on interest earned (called LIFO – Last in; First Out), then principal is returned tax free. Taxes on annuity income is amortized over the expected life of the distribution stream.

Taxable assets, such as bank CDs or corporate bonds, accumulate without the protective shell of a qualified plan or annuity and are distributed tax free (because taxes are paid as the assets compound each year). However, this compounding can balloon your personal taxable income and push the retiree into the highest tax brackets.



Conclusions:• Over-funded life insurance policies are an efficient source of retirement income

• Cash growth in a life policy normally lags other retirement accumulation sources during the working years, but its unique financial structure supports much higher relative retirement income payouts

• FLIPPs & ILIPPs are the only retirement funding assets that protect your spouse with built-in plan completion features in the event of pre-retirement death.

• FLIPPs & ILIPPs have built-in survivor benefits in the event you pre-decease your spouse during retirement

• Life insurance is the only retirement asset that increases your estate at death and balloons the wealth passing to your heirs

**All life insurance policy must be purchased through a life insurance agent licensed in the state of residence of the policy purchaser. A NAIC compliant illustration must be provided to all buyers. Not all life insurance agents are familiar with this concept. Not all life insurance policies are suitable for this concept. Interest consumers should proceed with caution. Please read consumer notices that follow.

For additional information on this financial concept visit MarketLinking.com

Links to Impartial Providers of Historical Asset Class Performance

Copyright 2015 - All Rights Reserved

Federal Reserve Board posts returns from a variety of fixed income asset classes, some of which extend as far back as the early 1900’s. Please visit: http://www.federalreserve.gov/releases/h15/data.htm

Ibbotson, owned by Morningstar, compiles an extensive list of asset returns and focuses on stock market based asset returns. http://corporate.morningstar.com/ib/asp/subject.aspx?xmlfile=1414.xml

Capital Strategies Press publishes an annual summary of indexed performance. Their numbers are independent of the projections made by the insurance carriers. http://CapitalStrategiesPress.com

Yahoo financial database: http://finance.yahoo.com/market-overview/

MarketLinking.com offers a public access database on a variety of market linked and indexed returns. Visit http://MarketLinking.com

Important Notes and Disclaimers (Please Read)


The performance comparisons used in this presentation make assumptions about future rates of return. These assumptions may or may not be valid. No one knows the future. Our only guide is the past and the future returns from various asset classes may not reflect their historical averages or ranges. The comparisons used herein are solely for the illustrative purposed.

Knowledge is power and when making financial decision knowledge is essential. Every consumer, whether making investment, savings or insurance decisions should carefully study the past performance of every asset class under consideration in order to make an informed decision about their expectations of the future performance of that asset class. There are a number of independent third party sources of asset returns. All consumers should consult one or more of these sources or other impartial third parties that maintain similar databases and/or analysis.

Meaningful financial planning requires unbiased information. Financial decisions about retirement funding, future retirement income, building a family nest egg, and purchasing insurance to provide financial protection for life’s unexpected events all require making assumptions about future performance. Unless these assumptions are based on expectations that have a reasonable probability of being close to future results, you are not planning, you are guessing.

Please discuss asset class returns with a competent financial professional before making a final decision about how to allocate your financial resources. This should be more than a cursory discussion. If the financial professional you have chosen to trust seems uniformed in any way on the subject of asset class performances, you should seriously consider replacing them and finding a more knowledgeable professional.

Please, please, please take the time to build your personal knowledge of the various financial products and the performance and liquidity characteristics of the asset classes available to you.

Important Notes and Disclaimers (continued)


The National Association of Insurance Commissioners (NAIC) has formulated guidelines for illustrations that must be presented to each potential purchaser of cash value life insurance. These multi-page illustrations are carrier, product and insured specific and contain substantial disclaimers, warnings and clarifications. The summary presented herein is taken from one set of annual yield assumptions and premium inputs. Alternate assumptions can produce radically different policy performance, including early lapse of the policy. The age and health status of the insured is likewise a key assumption that when changed, can lead to policy performance much less favorable to the policy owner. These types of life insurance policies can only be purchased through the services of a life insurance agent licensed in your state of residence. If you are interested in learning more about the retirement cash flow features of cash value life insurance, please confer with a licensed agent and have her/him prepare NAIC compliant illustrations using reasonable assumptions. We strongly advise that consumers never rely on the carrier’s highest historical return. A lower return assumption will make the outcome more likely. We also strongly advise that the interest rate spread assumed on any variable loan be reasonable in light of historical performance data. The spread is the difference between the assumed policy crediting rate and the rate charged on policy loans. Example: the policy yields an annual return of 8.3% and a loan charge of 5.5%, then the spread is 2.8%. A 2.8% spread is unreasonable and will create an internal compounding during the loan period that will inflate the available retirement funds substantially. Since a 2.8% spread has never been sustained during any past economic period, the results illustrated will be an illusion and will never occur. The variable loan rate of an indexed policy is tied to the commercial bond rate. Universal life insurance carriers invest policy cash values funds in the commercial bond market. If the insurance carrier charges the policy holder less than its bond earnings, the carrier will lose money. A history of commercial bond rates are published by the Federal Reserve and can be found on the Internet The spread is a critical element of all indexed universal life illustrations that employ the universal loan. If your agent glosses over the importance of the spread or seems fuzzy on its criticality, get a new agent, because you are not working with a true professional.

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